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The American Airlines Case: A Chance to Clarify Predation Policy

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  • Edlin, Aaron S.
  • Farrell, Joseph

Abstract

Predation occurs when a firm offers consumers favorable deals, usually in the short run, that get rid of competition and thereby harm consumers in the long run. Modern economic theory has shown how commitment or collective-action problems among consumers can lead to such paradoxical effects. But the paradox does signal danger. Too hawkish a policy might ban favorable deals that are not predatory. “It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high.†Predation policy must therefore diagnose the unusual cases where favorable deals harm competition. To this end, courts and commentators have largely defined predation as “sacrifice†followed, at least plausibly, by “recoupment†at consumers’ expense. The American Airlines case raises difficult questions about this approach.

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Bibliographic Info

Paper provided by Competition Policy Center, Institute for Business and Economic Research, UC Berkeley in its series Competition Policy Center, Working Paper Series with number qt32h8b40m.

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Date of creation: 02 Oct 2002
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Handle: RePEc:cdl:compol:qt32h8b40m

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Keywords: competition; recoupment; sacrifice;

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References

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  1. Joseph Farrell & Michael L. Katz, 2003. "Innovation, Rent Extraction, and Integration in Systems Markets," Development and Comp Systems 0303005, EconWPA.
  2. Severin Borenstein, 1992. "The Evolution of U.S. Airline Competition," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 45-73, Spring.
  3. Klevorick, Alvin K, 1993. "The Current State of the Law and Economics of Predatory Pricing," American Economic Review, American Economic Association, vol. 83(2), pages 162-67, May.
  4. Farrell, Joseph & Katz, Michael, 2001. "Competition or Predation? Schumpeterian Rivalry in Network Markets," Department of Economics, Working Paper Series qt5xw2d98g, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Bolton, P. & Brodley, J.F. & Riordan, M.H., 1999. "Predatory Pricing: Strategic Theory and Legal Policy," Discussion Paper 1999-82, Tilburg University, Center for Economic Research.
  6. Baumol, William J, 1996. "Predation and the Logic of the Average Variable Cost Test," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 49-72, April.
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Citations

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Cited by:
  1. Sayed Ajaz Hussain & Serkan Bahceci, 2008. "Network Structure and Design in the Deregulated U.S. Airline Industry: an Argument for Re-Regulation?," Working Papers tecipa-325, University of Toronto, Department of Economics.
  2. Shapiro, Carl & Farrell, Joseph, 2008. "Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition," Department of Economics, Working Paper Series qt35c5f846, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Kim, Sung-Hwan, 2009. "Predatory reputation in US airline markets," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 592-604, September.
  4. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers 2003-22, Brown University, Department of Economics.
  5. David Besanko & Ulrich Doraszelski & Yaroslav Kryukov, . "The Economics of Predation: What Drives Pricing When There is Learning-by-Doing?," GSIA Working Papers 2011-E8, Carnegie Mellon University, Tepper School of Business.
  6. Yaroslav Kryukov & Ulrich Doraszelski & David Besanko, . "The economics of predation: What drives pricing when there is learning-by-doing?," GSIA Working Papers 2011-E30, Carnegie Mellon University, Tepper School of Business.
  7. Stefano Colombo, 2010. "Discriminatory Prices, Predation and Signal-Jamming in a Horizontal Differentiation Model," Journal of Industry, Competition and Trade, Springer, vol. 10(2), pages 87-104, June.
  8. Besanko, David & Doraszelski, Ulrich & Kryukov, Yaroslav, 2011. "The economics of predation: What drives pricing when there is learning-by-doing?," CEPR Discussion Papers 8708, C.E.P.R. Discussion Papers.
  9. Hugo Ferreira Braga Tadeu & Jersone Tasso Moreira Silva, 2012. "A Theoretical Framework for the Brazilian Airline Competitive Market Environment," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 97-106, May.

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